Borders's New Chairman: Bad For Business?

Borders (BGP) has itself a brand new chairman. Financier Bennett LeBow's recent $25 million stock purchase gives him a 15.5% stake in the company. When anyone swoops in with that much money and buys into a long-struggling organization, it's bound to raise some eyebrows. After all, it's not clear why the CEO of the Vector Group (VGR) -- a renowned corporate raider -- is taking such a big interest in the second largest brick-and-mortar book retailer and what he plans to do with that stake is also a mystery. So far, only one thing seems clear: If you're a Borders shareholder, LeBow's prior history will make you very nervous.

The Liggett Legacy

LeBow is best known for using the Vector Group (then known as Brooke Group) as a massive holding company for the Liggett Group, the more than 140-year-old company LeBow bought in 1986 in order to get his foot in the door of the multi-billion-dollar tobacco industry. Liggett was a small player among giants like Philip Morris -- now Altria (MO) -- RJ Reynolds (RAI) and the Lorillard Tobacco Company, but there was still much profit to be had.

A decade later, however, the good times for the tobacco industry were coming to an end thanks to a number of class action lawsuits. LeBow, through Liggett, thought the time was right to try something unusual: a hostile takeover of RJR. Corporate raider Carl Icahn -- currently doing battle to take control of movie studio Lionsgate -- tried the same hostile takeover gambit. Neither proved successful.

LeBow couldn't get RJR, but he did stir things up for the entire industry. At the time, Liggett was the sixth-largest tobacco business -- large enough to make money, but small enough that losing a class-action lawsuit (or several, thanks to the efforts of more than 40 state attorneys general) would put a serious dent in business. And going into the red with Liggett was simply not an option for LeBow. So LeBow broke ranks with the rest of the industry and agreed to settle the lawsuits against it by stating that lung cancer was caused by cigarette smoking (just because the Surgeon General said so in the 1960s, didn't mean tobacco companies had to follow suit.) This did not endear him to his foes, especially when it turned out that Philip Morris was paying Liggett's legal fees so they could stage-manage the lawsuit defense.

About ten years later, LeBow distanced himself from his bolder declarations of the 1990s, falling back on the overused justification that one couldn't find a direct link between smoking cigarettes and lung cancer.

A History of Bad Moves

The tobacco industry business was one thing; how LeBow conducted himself during the boom and bust days of his two other key companies -- particularly Management Assistance Inc., now MAI Systems Corporation, and also New Valley Corporation -- suggests why Borders stakeholders should be on alert.

As the Los Angeles Times reported in 1988, "LeBow has been attracted to a certain kind of deal. He picks weak and unpopular companies, invests very little of his own money, installs capable managers -- and waits for profits to roll in." But time and time again, the honeymoon period of rolling profits gave way to more catastrophic long-term events that should have Borders shareholders questioning LeBow's motives, not only about the company, but for rival book retailer Barnes & Noble (BKS).

To be fair, the fortunes of MAI were not great when LeBow bought its Basic/Four division for $100 million in a leveraged buyout in 1984. Another investor, Asher Edelman, had waged a bitter proxy fight for the entire company, then started selling off or liquidating assets as quickly as possible to get much-needed cash. Basic/Four was nowhere near turning a profit as the tide turned away from business computers to personal computers produced by IBM or Apple. And for a few years, the company -- now known as MAI Basic/Four, Inc. -- turned itself around. With the leveraged debt taken care of by increasing sales and profits, MAI started buying back old properties, and by 1988 its net income peaked at $24.5 million on $420 million in revenue.

Those good terms, however, were something of a smokescreen for LeBow's larger ambitions, resulting in moves that didn't just sink MAI, but also helped doom another rival in the computing business. A failed 1988 hostile takeover of Prime Computer cost MAI $25 million, plenty of bad PR and, by 1995, LeBow his positions as CEO and chairman of the company. Two years before that, saddled with $84 million in debt, MAI had filed for Chapter 11 bankruptcy.

LeBow's troubles hardly ended there. In 1993, Brooke Group shareholder Frank Gyetvan sued LeBow on behalf of other company shareholders, claiming Brooke had improperly lent LeBow money for luxury personal items, such as a $21 million yacht. The suit was settled the following year, with LeBow repaying $16 million to Brooke's other shareholders and giving up his right to receive $6.25 million in preferred dividends. Brooke -- never much of a profit earner -- found its debt ballooning to $400 million, and the company's 1997 restructuring brought with it a new name and company, The Vector Group.

A Lower Profile, but Ready to Strike

LeBow has kept a much lower profile of late, but there are some lessons for Borders stakeholders buried in his past. First, LeBow's personal agenda will likely trump what the company wants. Why else would LeBow be so handsomely rewarded with a greater stake in the company through additional warrants, even if shareholders balk at his taking over as chairman of the board? Second, to the chagrin of employees, turning the company around will almost certainly result in "streamlining" -- layoffs, store closings, massive asset selloffs. Compounding these problematic issues is the fact that at this point, based on Thursday morning's earnings call, it doesn't appear that Borders has a radical new plan for competing with rival Barnes & Noble or online retailer Amazon (AMZN).

Back in 1988, LeBow's wife told the New York Timesthat her husband ''is a man who makes his own breakfast, so he can have exactly what he wants just when he wants it.'' For Borders' shareholders, against all odds, here's hoping LeBow is suddenly in the mood for the Breakfast of Champions.
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